Ireland Sees $2.4 Billion Hit From a 4-Letter Word

(Bloomberg Opinion) -- Pressure has been mounting on Ireland's low-tax, high-tech economic model for some time. The country's 12.5% corporate-tax rate — one of the 20 lowest in the world — has enraged allies in the European Union and beyond, who see Dublin as sucking profits away from other countries while becoming increasingly dependent on powerful firms like Alphabet Inc.'s Google and Apple Inc. for jobs and investment.

It looks like Covid-19 is tipping the scales toward action. President Joe Biden's administration has signaled it's giving more support to an OECD-led crackdown on tax loopholes in the world economy — called BEPS for domestic tax base erosion and profit shifting — reversing Donald Trump's hostility to the initiative and echoing a trend away from competitive corporate tax slashing. It's a step in the right direction, even if challenges remain.

The BEPS process, involving more than 135 countries and jurisdictions, is currently focused on two measures: Allocating cross-border taxable profits to better reflect where customers and corporate value are located, and setting a minimum rate of tax. This would, the thinking goes, better level the tax playing field between virtual behemoths like Google and Facebook Inc. and their brick-and-mortar competitors.

Neither effort is in Ireland's favor. The country is a tiny consumer market of 5 million. Dublin already expects a hit to its tax take of up to 2 billion euros ($2.4 billion) annually from BEPS as profits are reallocated elsewhere.

The direction of travel is similar to where things were headed after the 2007 financial crisis, when cash-strapped countries raced to fill holes in their tax coffers. The pandemic landscape feels even more desperate: the size of the budget hole is even bigger, the anger against inequality more palpable and the corporate winners even richer. As much as $240 billion in tax revenue is lost every year to profit shifting, according to the OECD. Acknowledging the forces at work, Ireland's finance minister has said “disruptive” change is on the way.

Despite the country's long-standing attachment to tax competitiveness, once described by U2 rocker Bono as the “only prosperity” Ireland had ever known, this could be disruptive in a good way. Even Dublin knows a globally coordinated approach to tax is better than a free-for-all that would build resentment against its way of doing things. That would mark a different kind of globalization, as economist Gabriel Zucman puts it, based on tax convergence rather than tax competition.

It would also give Ireland a chance to build up other areas of its economy. Gerard Brady, an economist at Irish employers' group Ibec, reckons competing for investment in a post-Covid world is probably going to mean investing in skills and education rather than tax incentives for corporations. And as big tech firms including Facebook Inc. quietly unwind contentious past tax arrangements, the government might have more opportunity to support small Irish businesses.

The BEPS process doesn't come without risks, though. Adding more rules to an already fiendishly complex global tax system isn't easy. It may simply provide more opportunities for tax lawyers to prove their worth to clients. Michael Devereux, a professor at Oxford University's Said Business School, says the measures being discussed could come with loopholes. For example, having a sufficient business “presence” in a jurisdiction, such as research and development, would seem to earn carve-outs from the rules.

We also still don't know what minimum rate will be agreed. To be taken seriously, you'd expect a rate closer to 20% than 10%, especially given Biden's campaign pledge to double the U.S. tax rate on foreign profits to 21% from 10.5%. (One group of advocates including Nobel laureate Joseph Stiglitz is calling for 25%.)

If Dublin really believes this is a disruptive moment, its politicians should take a more proactive role in determining what the future of taxation will look like. Momentum is building: The EU recently put country-by-country financial reporting of revenues and other metrics back on the table, in order to encourage transparency. Austria and several countries dropped their opposition and supported it.

Given what's coming down the pipe, a country like Ireland should seek to act preemptively by scrapping its current approach to tax and planning for a post-Covid future. So far, it seems to have taken the opposite tack, resisting new initiatives and slowly phasing out old ones. With tax justice on the rise, and U.S. multilateralism back, four-letter words will be expensive for Dublin.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering the European Union and France. He worked previously at Reuters and Forbes.

©2021 Bloomberg L.P.